Overview
Corporate governance is about commitment to values and ethical business conduct. Good corporate governance is reflected in fair, transparent and responsible interactions between a company's management, its board of directors, shareholders and other stakeholders.
Interest in the subject has increased dramatically after the series of corporate failures in the United States, Europe and elsewhere. These large corporate failures led to destruction of shareholder wealth, and caused losses to the financial system, trade counterparties and employees. More importantly, investors and other stakeholders lost trust and confidence in companies, even those that were unaffected by these events.
CRISIL's analysis of these corporate failures reveals that they are largely attributable to shortcomings in corporate governance practices. The broad areas of failure are:
• Accounting frauds carried out in collusion with statutory auditors
• Lack of independence of the board with board members having significant financial linkages with
the companies
• Insider trading
• Disproportionate compensation paid to executive board members and senior management
• Fiduciary failure by the board to exercise care and diligence in approving proposals, even though all the information was provided by the management
• Weak internal control mechanisms and lack of supervision Corporate governance has thus become a critical area of focus for various market participants and stakeholders.
